Income tax developments. This page provides generalized information and may not apply to you and should not be acted upon without specific professional advice. You should consult your tax adviser if you have any questions.

Saturday, December 29, 2012

There has been an email floating around urging the recipients to forward it to their friends, disputing that Social Security is a "Federal Benefit Payment", see below.

While it's probably politically incorrect to disagree with that allegation since most people do believe they are just receiving what they have already paid into the system when they retire, unfortunately, that is simply not true.

Today, most new Social Security recipients receive their full benefit when they reach age 66. The average life expectancy in the U.S. today is 78.5 (see http://www.cdc.gov/nchs/fastats/lifexpec.htm). So on average, a recipient receives 12.5 years of full benefit.

Let's just accept, for now, the example given in the email, an average worker making 30K a year over a 40 year working life would have paid in $180,000 between his own contribution and his employer's matching contribution. Amortize that $180,000, earning 3%, over 12.5 years, the monthly payment is 1,440.51, not the $3,277 amount claimed by the email.

On top of that, there are several other errors in the assumptions made by email.

Social Security is calculated based on the highest 35 years of indexed earnings (http://www.ssa.gov/oact/progdata/retirebenefit1.html). There is a maximum amount of wages subject to Social Security called the wage ceiling. The wage ceiling did not reach $35,000 until 1983, or 30 years ago. Additionally, the email assumes a combined social security tax rate of 15% for all those years. The fact is the Social Security tax rate is much lower than that during the last 35 years. Other than 2011 and 2012 where workers enjoyed a 2% Social Security tax holiday, the maximum tax rate since 1990 for employee has been 6.2%. So even if one includes the employer matching contribution, the tax rate was no more than 12.4%. The combined tax rate 35 years ago in 1978 was 7.1%, with the employee paying 3.55% and the employer paying 3.55% (http://www.ssa.gov/oact/progdata/taxRates.html). So the $180,000 amount is way over-stated.

On top of that, to include the employer matching fund in the calculation is questionable. Without a federal mandate, I am not aware of any employer who is that generous, matching employee's contribution dollar for dollar. Even if one considers the employee has earned that matching contribution, the employee has not paid any income tax on that matching contribution. Besides, most people I know live well beyond age 78.5.

Social Security is also skewed toward low income taxpayers. Basically, it's a set of calculations that helps level the playing field
between lower wage earners and higher wage earners. For instance, low
wage earners who retired at age 66 will receive benefits of about 56 percent of their pre-retirement income; for medium wage
earners, the figure is about 34 percent; and for high wage earners, it is just over 15%. Let's take a look at an example:

For a worker with average indexed monthly earnings (AIME) of $3,585 retiring in 2013, he would receive $1,605.90 per month, calculated as follows: 90% of $791 + 32% of ($3585 - $791), rounding the result down to the nearest dime.

For those with AIME over $4,768, they only receive 15% of the excess. See http://www.ssa.gov/oact/cola/piaformula.html.

There is also a "special minimum" benefit for certain individuals who've had long periods
of relatively low earnings.

There are additional Social Security benefits. For example, a worker whose spouse does not work outside the home or works very little outside the home, his/her spouse is entitled to 50% of the worker's monthly benefit amount. And when a worker dies, his/her surviving spouse may be able to take over the decedent's Social Security benefits. There are also benefits for an eligible divorced spouse. A child under age 18 is entitled to collect Social Security if the worker becomes disabled. And of course, there is a Social Security Disability Benefit for the worker as well.

And now, there have been rumors that future Social Security may be based on needs, i.e., means testing.

So my conclusion is that Social Security is a Federal Benefit Program, even though we contribute into it while we work. The benefits for most people are far greater than what they have contributed. Lastly, Social Security has always been labeled a "Federal Benefit Payment", this is not new.

Here is the email:

SOCIAL SECURITY NOW CALLED 'FEDERAL BENEFIT PAYMENT' ENTITLEMENT!

Have you noticed, your Social Security check is now referred to as a "Federal Benefit Payment"?

I'll be part of the one percent to forward this. I am forwarding it because it touches a nerve
in me, and I hope it will in you. Please keep passing it on until everyone in our country has read it.

The government is now referring to our Social Security checks as
a Federal Benefit Payment. This isn't a benefit, its earned income! Not
only did we all contribute to Social Security but our employers did too.

It totaled 15% of our income before taxes. If you averaged $30K per year
over your working life, that's close to $180,000 invested in Social
Security. If you calculate the future value of your monthly investment
in social security ($375/month, including both your and your employer's contributions) at a meager 1% interest rate
compounded monthly, after 40 years of working you'd have more than $1.3+
million dollars saved!
This is your personal investment.

Upon retirement, if you took out only 3% per year, you'd receive $39,318
per year, or $3,277 per month. That's almost three times more than
today's average Social Security
benefit of $1,230 per month, according to the Social Security
Administration (Google it - it's a fact).

And your retirement fund would last more than 33 years (until you're 98
if you retire at age 65)! I can only imagine how much better most
average-income people could live in retirement if our government had
just invested our money in low-risk interest-earning accounts.

Instead, the folks in Washington pulled off a bigger Ponzi scheme than
Bernie Madoff ever did. They took our money and used it elsewhere.
They "forgot" that it was OUR money they were taking. They didn't have a
referendum to ask us if we wanted to lend the money to them.

And they didn't pay interest on the debt they assumed. And recently,
they've told us that the money won?t support us for very much longer.
But is it our fault they misused our investments?

And now, to add insult to injury, they're calling it a "benefit," as if we never worked to earn every penny of
it. Just because they "borrowed" the money, doesn't mean that our investments were a charity! Let's take a stand.

We have earned our right to Social Security and Medicare. Demand that
our legislators bring some sense into our government. Find a way to keep
Social Security and Medicare going, for the sake of that 92% of our
population who need it.

Monday, December 3, 2012

Nobody likes the alternative minimum tax - an alternative tax system that was originally designed to make sure wealthy people who used a lot of esoteric tax shelters paid some federal income tax. Most of those shelters are gone now and the AMT is mainly hitting higher-income people who pay a lot of state income and real estate taxes and, to a lesser extent, families with a lot of children.

Taxpayers are supposed to compute their taxes under both the AMT and the regular system and pay whichever is higher. Although AMT rates are lower - the top rate is 28 percent compared with a maximum rate of 35 percent under the regular tax system (or 39.6 percent if the Bush tax cuts expire) - fewer deductions are allowed under the AMT.

The result is that most higher-income people owe AMT, especially if they live in high-tax states. Nationwide, only 2.8 percent of tax returns filed in 2010 owed AMT, but 4.5 percent of those coming from California did. Among those in California with adjusted gross income between $200,000 and $1 million, about 85 percent owed AMT. Above $1 million it is somewhat less common because the super-rich often owe more under the regular tax system.

The AMT has been in the news lately because Congress still has not passed a so-called patch that would prevent it from reaching further down into the middle class and hitting an estimated 33 million taxpayers in 2012 compared with about 4 million in 2011. Most people think Congress will pass a patch.

What's less well known is that for some people, the AMT has a silver lining. Assuming Congress passes a patch for 2012 and 2013, people who are in AMT and stay in AMT will be somewhat protected from an increase in regular income tax rates if the Bush-era tax cuts expire.

That's because they will still be paying a top AMT rate of 28 percent even if the top regular rate goes to 39.6 percent. This won't be true for everyone in AMT; people who fall out of the AMT could see their taxes go up.

To understand why, you have to know how the tax is computed.

To calculate AMT, you start with your taxable income under the regular tax system, then add back deductions not allowed under the AMT. This includes state and local income and property taxes, miscellaneous itemized deductions and the personal exemptions you get for yourself, spouse and dependents.

How AMT works

From this, you subtract a flat amount known as the AMT exemption (which phases out over a certain income level).

If what is left is greater than zero, you calculate a tentative AMT at a rate of 26 percent up to a certain amount of income and 28 percent over that. If this is bigger than your regular income tax, you pay the excess as an additional tax. That additional tax shows up on tax returns as alternative minimum tax.

The amount can be substantial: In 2010, people with $200,000 to $500,000 in adjusted gross income who were subject to AMT paid an extra $6,150, on average.

The Bush tax cuts reduced regular marginal tax rates, but left the AMT, including the exemption amount, alone. As regular taxes came down and people's incomes grew, more people got pushed into AMT.

Several patches

To prevent it from falling into the middle class, Congress has been passing temporary, one-year increases in the exemption amount at the end of each year. This is the patch.

For 2011, the exemption was $74,450 for married couples filing a joint return and $48,450 for singles. If Congress passes a patch for 2012, which is expected, those amounts would rise about 2.4 percent for 2012 and the AMT would hit roughly the same number of people as in 2011.

Without a patch, the amounts would revert to $45,000 for couples and $33,750 for singles - and throw about 29 million more people into AMT.

Among people with $75,000 to $100,000 in income, the percentage subject to AMT would rise from 1 percent to 52 percent, and their average tax increase would be about $1,600, according to Bob McIntyre, director of Citizens for Tax Justice. Even so, the bulk of the alternative minimum tax - 82 percent - would still be paid by people making more than $100,000, he says.

Congress is expected to patch the AMT by raising the exemption amount this year, but what happens next year?

If Congress approves another patch for 2013 but the Bush tax cuts expire and regular rates go up, many people who are in AMT will be somewhat protected from higher taxes if they are still in AMT next year; their tax rate will still be 28 percent.

Unusual possibilities

People who are in AMT now but go back into the regular tax system if the Bush tax cuts expire would see a tax increase. This could, perversely, make them "nostalgic for the AMT," says Patrick Geddes, chief investment officer with Aperio Group.

This could happen to people who are on the borders of AMT at both the high and low end of the income spectrum.

Republicans have proposed extending all of the Bush tax cuts; President Obama favors letting taxes go up only for people making more than $250,000 (married) or $200,000 (single).

If Obama's plan wins, some people with incomes above $200,000/$250,000 won't be affected because they will still be in AMT, paying a top rate of 28 percent (assuming that rate does not change). "If you are deep into AMT, you are not going to be affected," Geddes says. "AMT may make the debate (over marginal tax rates) moot for a lot of high-end taxpayers."

Take a hypothetical married couple with two children and $400,000 in income, including $5,000 in long-term capital gains and $5,000 in qualified dividends. They have $70,000 in itemized deductions, including $45,000 in state income and property taxes.

In 2012, they would owe $93,900 in taxes, according to CCH, a tax information firm.

In 2013, under the Obama plan, their regular marginal rate would rise to 36 from 33 percent, but they would still be in AMT. Their tax bill would go up by $900, less than a 1 percent increase.

(The example assumes the AMT exemption is patched at $78,750 for 2012 and 2013 and that capital gains are taxed 20 percent and dividends are taxed as ordinary income in 2013.)

What happens to any individual depends on their unique circumstances. Taxpayers can use calculators at the Tax Policy Center (calculator.taxpolicycenter.org) or Tax Foundation (mytaxburden.org) to estimate their tax under various scenarios, but it helps to know something about taxes and the policy options.

If Congress overhauls the tax system, all bets are off. The AMT could be abolished or replaced with some better way of making sure that the super-rich don't pay a lower effective tax rate than people earning less.

Who pays AMT?

Only 2.8 percent of federal tax returns filed in 2010 owed alternative minimum tax, but 4.5 percent of returns from California had it. AMT is most common among taxpayers with $200,000 to $1 million in income.

Because of the inability of the two political parties to work together in Washington, President Obama signed into law the Budget Control Act in 2011 in order to raise the nation’s debt ceiling. That law calls for an automatic cut of about a trillion dollars from the federal budget across the board over ten years. This automatic cut, commonly known as “sequestration”, was never intended to take effect. But since Washington is still in a gridlock, we are now faced with this fiscal cliff.

What the fiscal cliff will do on top of the spending cuts is to potentially raise taxes by more than $500 billion in 2013 – an average of almost $3,500 per household. Much of it will come from the expiration of the so called “Bush tax cuts”.

Here is a partial list of the tax increases, not in any particular order:

The maximum capital gains will generally go up from 15% to 20%

Tax rate for qualified dividends will increase from 15% to the taxpayer’s highest marginal tax bracket

The lowest tax bracket will rise from 10% to 15%

The highest tax bracket will go from 35% to 39.6%

Employees’ portion of social security tax rate will go up from 4.2% to 6.2%

Teachers will lose their $250 deduction for non-reimbursed classroom supplies

Higher education tuition will no longer be deductible against gross income

The American Opportunity tax credit for higher education will expire and the Hope tax credit will return

Maximum annual contribution to a child’s education IRA will decrease from $2,000 to $500

Child tax credit will drop to $500 from the current $1,000 per qualified child

Maximum dependent care expenses allowed will decrease from $3,000 to $2,400 per child for up to two children

Marriage penalties will be re-introduced for lower tax brackets

Phase out of itemized deductions and personal exemptions will return

Exemption for alternative minimum tax (AMT) will drop dramatically, from $74,450 in 2011 to $45,000 in 2012 for married couples and from $48,450 in 2011 to $33,750 in 2012 for singles

Taxpayers age 70½ or older can no longer give money directly to charities from their IRAs and deduct the donation against gross income on page 1 of Form 1040

§179 deduction for businesses will drop from $500,000 to $139,000

Bonus depreciation will decrease from 100% to 50%

Certain incentives for employees to take public transit will expire

Homeowners with cancelled mortgage debt will face higher hurdles to exclude the forgiven amount from income

That scenario is being described as a fiscal cliff. And if American taxpayers are nudged over that cliff by Congressional inaction, most of them will face dramatically higher tax bills.

Estimates by tax policy groups and government accountants put the total tax cost at more than $500 billion in 2013.

That averages out to almost $3,500 per household, according to calculations by the Tax Policy Center. Middle-class taxpayers are likely to see an average increase of almost $2,000.

Using Tax Policy Center data and hypothetical taxpayers, Bankrate shows what some tax bills might look like if lawmakers don't soon put up a guardrail at the fiscal cliff's edge.

The single tax filer

Joe is single and has an adjusted gross income of $60,000 a year. As is the case among two-thirds of the tax-paying population, Joe claims the standard deduction.

After subtracting the projected 2013 personal exemption of $3,850 and standard deduction of $6,050 for a single taxpayer, Joe's taxable income comes to $50,100.

If the current tax laws are extended beyond 2012, that would mean $8,900 of Joe's income would be taxed at only 10 percent, and his top tax rate would be 25 percent. This would leave him with a tax liability of $8,465.

If the current rates expire, however, Joe's tax bill would be $863.50 higher.

The reason? There would no longer be a 10 percent rate, making more of Joe's earnings taxed at 15 percent, and his top tax rate would be 28 percent instead of 25 percent.

Married couple filing jointly

Jane and Bill have two kids: 10-year-old Jimmy and 8-year-old Sarah. Both parents work, bringing home a combined adjusted gross income of $175,000. They don't yet own a home, so without mortgage interest to deduct, they're still claiming the standard deduction.

If the current tax laws stay in place, their four personal exemptions totaling $15,400 plus the $12,100 standard deduction will get them to $147,500 in taxable income, resulting in a tax liability of $28,803.

But Jane and Bill wouldn't have to send the Internal Revenue Service that much. Thanks to the $1,000 per-child tax credit, their final tax bill would be $26,803.

If the tax laws expire, however, Jane and Bill's tax bill will go up by $6,304 to $33,107. That takes into account that the child tax credit would return to its pre-tax-cut level of just $500 per kid.

One reason for the increased tax bill is the return of the marriage tax penalty. This is where a couple pays more taxes by filing one joint return than they would if they filed two returns as single taxpayers. Wider tax brackets and a larger standard deduction for married couples now help ease the penalty.

Instead of facing a top tax rate of 28 percent, Jane and Bill would be in the 31 percent tax bracket if the tax cuts expire.Single parent head of household

Kathryn is a divorced working mom of 7-year-old Jonah. She makes $75,000 a year via her salary and alimony payments.

By filing as head of household, Kathryn's standard deduction of $8,900 and personal exemptions totaling $7,700 for herself and her son get her to $58,400 in taxable income.

Taxes on that amount are currently collected at the 10 percent, 15 percent and 25 percent rates, giving Kathryn a tax bill of $9,125. She knocks $1,000 off that thanks to the child tax credit.

But if the tax cuts expire, Kathryn's tax liability will be $1,435 more -- $9,560 -- in 2013. The bigger bill comes from losing the expired 10 percent and 25 percent tax rates, putting more of her income into the 15 percent and 28 percent tax brackets.

And just like all parents, married or single, Kathryn will only get a $500 child tax credit for her son starting in 2013.

Expiration of capital gains rates

If any of our hypothetical 2013 taxpayers have investments in a taxable brokerage account, their tax bills next year will be higher.

Long-term capital gains and certain dividend payments are taxed at lower rates than the regular, ordinary income rates, which now top out at 35 percent. Most taxpayers pay capital gains taxes at the 15 percent rate. Taxpayers in the 10 percent and 15 percent brackets don't owe any taxes on their gains.

But if today 's lower rates expire, the capital gains rates will go to 20 percent for most investors and 10 percent for those in the 15 percent tax bracket.

And dividends will lose their favorable tax treatment entirely. These payments will return to being taxed as ordinary income, meaning that taxpayers making enough to put them into the highest income tax bracket in 2013 would pay taxes on dividends at the top 39.6 percent income tax rate.

In addition, a provision in the health care reform law, often referred to as Obamacare, will kick in next year. This new 3.8 percent surtax will apply to capital gains, dividend and interest income of more than $250,000 for married couples filing jointly or $200,000 for other taxpayers.

Payroll tax holiday over

Every person who collects a paycheck knows that taxes reduce take-home pay.

In addition to income taxes, both federal and where applicable state, payments toward Social Security and Medicare, known as FICA taxes, are collected via withholding.

So that workers would have more money to spend and give the economy a boost, Congress enacted a 2 percent cut in the Social Security taxes paid by workers. This so-called payroll tax holiday has been in effect since 2011 but is scheduled to expire Jan. 1, 2013.

That means every worker will pay more taxes in 2013. The increase could be substantial for high-income earners.

Individuals who make up to the Social Security wage base of $113,700 next year will pay $7,049.40 in taxes for the retirement system. That's $2,425 more than this year because the wage base was slightly smaller ($110,100), and workers paid just 4.2 percent of their income toward Social Security instead of the regular 6.2 percent level that returns in 2013.Other expiring tax breaks

While the possibility of higher tax rates gets most of the attention as taxpayers near the fiscal cliff, many other provisions could cause higher taxes if they are allowed to end Jan. 1, 2013.

In addition to losing half of the current child tax credit, parents would get reduced savings from the child care tax credit.

Students looking for the $2,500 American opportunity education tax credit would find instead its predecessor the Hope credit, which maxes out at $1,800.

Lower paid workers could still claim the earned income tax credit, but eligibility requirements would be tougher and credit amounts lower.

The estate tax would apply to more property left at death, affecting estates worth more than $1 million instead of the current $5.12 million exclusion amount. The tax rate also would rise from the current 35 percent to 55 percent.

Higher-income taxpayers who itemize would again see their overall Schedule A claims reduced by 3 percent. A similar reduction also would apply to personal exemption amounts for wealthier filers.

And legislation to increase the alternative minimum tax income exclusion amount must be approved retroactively for 2012 as well as for 2013, or tens of millions more taxpayers will face higher tax bills because of this parallel tax.

Wednesday, November 14, 2012

The head of the Internal Revenue Service told lawmakers that if
Congress fails to extend the traditional patch for the Alternative
Minimum Tax, approximately 60 million Americans could be affected and
about 33 million taxpayers could pay the AMT for tax year 2012.

In a letter
to the leaders of the tax-writing House Ways and Means Committee and
the Senate Finance Committee, Acting Commissioner Steven T. Miller also
warned that tax season could be delayed for up to a month next year if
Congress does not act soon.

“A number of other tax provisions
affecting individuals also expired at the end of 2011,” he wrote. “These
include tax deductions for educators' out-of-pocket classroom expenses,
tuition and related fees for higher education, and state and local
sales taxes. The last provision is of particular importance to taxpayers
in states with no income tax.

"These tax law changes are generally not as complex and do not
present anything near the operational risk associated with the AMT
patch," Miller added. "Two years ago, Congress enacted legislation
extending these provisions retroactively in mid-December 2010. As a
result, the IRS made the necessary changes to its forms and systems, and
delayed the opening of the 2011 filing season by four weeks for
approximately 9 million affected taxpayers. If the IRS were presented
with a similar scenario of late enactment of tax extenders legislation
this year, I would anticipate a similar outcome. There would be some
inconvenience and delayed refunds for a substantial number of taxpayers,
but the overall risk to the tax filing season would be manageable.”

Congress has returned to session this week after the elections with taxes among
the top items on its agenda. The so-called “fiscal cliff” is looming
with the expiration of the Bush-era tax rates and dozens of other
traditional “tax extenders” at the end of the year, along with the
prospect of automatic cuts in both defense spending and discretionary
spending unless Congress and the Obama administration can agree on a
deficit reduction plan. The nation is also once again approaching its
borrowing limit and Congress will soon need to agree to raise the debt
ceiling.

Miller noted that the expiring tax provisions have added
uncertainty for next tax season. “This year has been particularly
challenging due to several unresolved tax issues,” he wrote. “When
Congress takes action well after this planning process is underway,
there is potential for substantial disruption to the filing season
ahead. As Congress returns this week, I wanted to provide you with a
detailed description of the effects on IRS operational planning if the
current uncertainty regarding the AMT and extenders continues.”

Miller noted that the AMT applies to individual taxpayers with incomes above
specific thresholds set by law, but for many years, Congress has been
enacting "patches" to index these income thresholds for inflation in
order to prevent millions of taxpayers from being subject to the AMT.
The last such patch expired on Dec. 31, 2011.

“More specifically,
for tax year 2011, the AMT exemption amount (as indexed for inflation)
was $48,450 for individuals and $74,450 for married taxpayers filing
jointly,” he explained. “Because of these thresholds, only about 4
million taxpayers paid AMT for tax year 2011. Under current law,
however, the thresholds revert to much lower levels for 2012—$33,750 for
individuals and $45,000 for married taxpayers filing jointly. At these
levels, approximately 33 million taxpayers would pay AMT for tax year
2012 (with returns filed in the spring of 2013). This is about 28
million more taxpayers who would pay the AMT than if the exemption
amounts were increased as in the past.”

Miller also pointed out
that the AMT patch has historically been accompanied by a special tax
credit ordering rule that applies to all taxpayers claiming certain tax
credits, whether they owe the AMT or not. “The ordering rules change the
order in which a number of popular tax credits are applied against tax
liability, and how they may be used to offset both regular and
alternative minimum tax,” he explained. “Taken together, the changes to
the AMT exemption amount and the special tax credit ordering rules could
affect more than 60 million taxpayers—nearly half of all individual
income tax filers. In addition, the changes to the tax credit ordering
rules that result from a lapse in the AMT patch are highly complex and
cut deeply into the core tax processing logic of IRS's critical filing
season technology systems.”

In prior years—most recently in 2007
and 2010—Congress allowed the AMT patch to lapse for more than 11
months, but then retroactively reinstated it, Miller observed. “In both
2007 and 2010, the IRS consulted with Congress and was provided with
bipartisan, bicameral assurances that Congress was working expeditiously
to enact a patch. The IRS, in turn, made a risk-based decision to leave
its systems programmed assuming that Congress would continue its
historical practice and again enact extensions of both the increased AMT
exemption amount and the special tax credit ordering rules.”

To stay consistent with past practice, Miller said he has instructed the
IRS staff again this year to leave its core systems "as-is" with respect
to the AMT, and hold off on the substantial design and engineering work
that would be required in order to revert the core tax systems back to
1998 law, which will otherwise apply for 2012 in the absence of any
action by Congress. “Therefore, if Congress enacts an AMT patch,
including both increased exemption amounts and the special tax credit
ordering rules, before the end of the 2012 calendar year, the IRS would
likely be able to open the 2013 tax filing season with minimal delays
for most taxpayers,” he said. “However, if there is no AMT patch enacted
by the end of the year, the IRS would be forced to operate the 2013 tax
filing season based on the expiration of the AMT patch. There would be
serious repercussions for taxpayers.”

Without an AMT patch, Miller
noted, about 28 million taxpayers would be faced with a very large,
unexpected tax liability for the current tax year (2012). “In addition,
in order to allow time for the IRS to make the programming changes
necessary to conform our processing systems to reflect expiration of the
AMT patch and the credit ordering rules, the IRS would, at minimum,
need to instruct more than 60 million taxpayers that they may not file
their tax returns or receive a refund until the IRS completes the
necessary systems changes,” he added.” Because of the magnitude and
complexity of the changes, it is entirely possible that these taxpayers
would not be able to file until late March 2013, if not even later. Tens
of millions of these taxpayers would unexpectedly have to pay
additional income tax for 2012, leaving them with a balance due return
or a much smaller refund than expected.

For millions of other taxpayers, refunds would be delayed.

“Finally, because the AMT patch already
expired at the end of 2011, there is no ability to consider partial
year extensions of the AMT (since by the end of 2012 it would have
already lapsed for an entire year),” he noted.

Lawmakers greeted
the news with dismay. “Congress must act now to address our unfinished
business and give middle-class families certainty by extending this
expiring relief,” said Ways and Means ranking member Sander Levin,
D-Mich., in a statement. “Just as there is no reason not to extend the
middle class tax cuts immediately, there is no reason Congress does not
act on a bipartisan basis as it has in the past to fix the AMT. The
consequences of inaction would be enormous for millions of middle class
taxpayers. Extending AMT relief will prevent a substantial and
unexpected tax increase on millions of Americans.”

Wednesday, November 7, 2012

Proposition 30 retroactively increases income taxes effective January 1, 2012. The measure creates three new personal income tax brackets
for rich residents and adds a quarter-cent to the sales tax. The higher
tax rates, which hit single filers making $250,000 and up and married
taxpayers earning at least $500,000, last for seven years, and push the
top tax rate to 12.3% for filers earning $500,000 and above, or $1
million per couple.

Proposition 30 also increases the state sales tax rate by 0.25% for four years,
beginning January 1, 2013, bringing the standard statewide rate to 7.50%
(currently 7.25%)..

Governor's Ballot Initiative

10.3% (1% increase) on income of:

$250,001–$300,000 for single/MFS; $340,001–$408,000 for HOH; and $500,001–$600,000 for MFJ.

11.3% (2% increase) on income of:

$300,001–$500,000 for single/MFS; $408,001–$680,000 for HOH; and $600,001–$1,000,000 for MFJ.

12.3% (3% increase) on income of:

More than $500,000 for single/MFS; More than $680,000 for HOH; and More than $1,000,000 for MFJ.

(Note: Income in excess of $1 million is also subject to the 1% mental health surcharge.)

The Affordable Care Act was enacted on March 23, 2010 and includes
the following important tax provisions that take effect in 2013.

Increased tax for high-earning workers and self-employed
The Medicare payroll tax is the main source of financing for
Medicare’s hospital insurance trust fund. This fund is responsible for
paying the medical expenses for beneficiaries who are age 65 and older
or disabled. Under current law, wages are subject to a 2.9% Medicare
payroll tax with workers and employers each responsible for half or
1.45%. Self-employed individuals pay both halves or 2.9%. The Medicare
tax is levied on all wages or earned income without limit.

Under the new law, there will be an additional .9% hospital insurance
tax (2.35% in total) that will apply to wages received in excess of
$250,000 for married filing joint; $125,000 for married filing separate;
and $200,000 for other filing statuses. This additional .9% tax applies
to the employee’s portion of the Medicare payroll tax and is collected
by the employer for wages in excess of $200,000. Self-employed
individuals are also responsible for the additional .9% hospital
insurance tax.

Surtax on unearned income of higher-income individuals
Currently, the Medicare payroll tax only applies to wages or earned
income. Under the new law, the Medicare tax will also apply to
investment income of individuals, estates and trusts. The surtax is set
at 3.8% of the lesser of: 1) the taxpayer’s net investment income; or 2)
the excess of modified adjusted income over $250,000 for married filing
joint or qualified widow, $125,000 for married filing separate, and
$200,000 for other filing statuses. For example, if a married couple
earns $200,000 in wages and $100,000 in capital gains, $50,000 will be
subject to the new surtax.

Net investment income includes interest, dividends, royalties, rents,
gross income from passive activities and the net gain from disposition
of property (other than trade or business). Investment income is reduced
by any allocable investment deductions. Income from tax-deferred
retirement accounts (401(k) plans) or excluded items (interest on
tax-exempt bonds) is not included in the definition.

Higher threshold for deducting medical expenses
Currently, taxpayers can take an itemized deduction for unreimbursed
medical expenses only to the extent that expenses exceed 7.5% of the
taxpayer’s adjusted gross income. Under the new law, the AGI floor is
raised from 7.5% to 10%. The AGI floor for individuals age 65 and older
remains at 7.5% through 2016, then it is increased to 10%.

Dollar cap on contributions to health FSAs
A Flexible Spending Arrangement (FSA) is an tax favored account and
is established through an employer’s cafeteria plan. Under an FSA, an
employee can set aside a portion of earnings to pay for expenses, such
as medical, dependent care or other expenses, as established in the
cafeteria plan. Currently, there is no limit on contributions to health
FSAs. Under the new law, allowable contributions to health FSAs will
capped at $2,500 per year and indexed for inflation after 2013.

Deduction eliminated for retiree drug coverage
A sponsor of a retiree prescription drug plan is eligible for subsidy
payments received from the Health and Human Services department. The
subsidy is equal to a portion of the retiree’s gross covered
prescription drug costs. Subsidies are excludable from the taxpayer’s
gross income.

Under current law, a taxpayer may claim a business deduction for any
covered retiree prescription drug expenses. Under the new law, amounts
otherwise allowable as a deduction for retiree prescription drug
expenses must be reduced by the excludable subsidy payments received. In
effect, this provision eliminates the double benefit the taxpayer may
receive.

Tuesday, October 23, 2012

Cost-of-Living Adjustment (COLA):
Based on the increase in the Consumer Price Index (CPI-W) from the
third quarter of 2011 through the third quarter of 2012, Social Security
and Supplemental Security Income (SSI) beneficiaries will receive a 1.7
percent COLA for 2013. Other important 2013 Social Security information
is as follows:

Tax Rate:

2012

2013

Employee

7.65%*

7.65%

Self-Employed

15.30%*

15.30%

NOTE:
The 7.65% tax rate is the combined rate for Social Security and
Medicare. The Social Security portion (OASDI) is 6.20% on earnings up
to the applicable taxable maximum amount (see below). The Medicare
portion (HI) is 1.45% on all earnings.

* The Temporary
Payroll Tax Cut Continuation Act of 2011 reduced the Social Security
payroll tax rate by 2% on the portion of the tax paid by the worker
through the end of February 2012. The Middle Class Tax Relief and Job
Creation Act of 2012 extended the reduction through the end of 2012.
Under current law, this temporary reduction expires at the end of
December 2012.

Maximum Taxable Earnings:

2012

2013

Social Security (OASDI only)

$110,100

$113,700

Medicare (HI only)

N o L i m i t

Quarter of Coverage:

2012

2013

Earnings needed to earn one Social Security Credit

$1,130

$1,160

Retirement Earnings Test Exempt Amounts:

2012

2013

Under full retirement ageNOTE: One dollar in benefits will be withheld for every $2 in earnings above the limit.

$14,640/yr.
($1,220/mo.)

$15,120/yr.
($1,260/mo.)

The year an individual reaches full retirement ageNOTE: Applies only to earnings for months
prior to attaining full retirement age. One dollar in benefits will be
withheld for every $3 in earnings above the limit.
There is no limit on earnings beginning the month an individual attains full retirement age.

$38,880/yr.
($3,240/mo.)

$40,080/yr.
($3,340/mo.)

Social Security Disability Thresholds:

2012

2013

Substantial Gainful Activity (SGA)
Non-Blind
Blind

$1,010/mo.
$1,690/mo.

$1,040/mo.
$1,740/mo.

Trial Work Period (TWP)

$720/mo.

$750/mo.

Maximum Social Security Benefit: Worker Retiring at Full Retirement Age:

2012

2013

$2,513/mo.

$2,533/mo.

SSI Federal Payment Standard:

2012

2013

Individual

$698/mo.

$710/mo.

Couple

$1,048/mo.

$1,066/mo.

SSI Resources Limits:

2012

2013

Individual

$2,000

$2,000

Couple

$3,000

$3,000

SSI Student Exclusion:

2012

2013

Monthly limit

$1,700

$1,730

Annual limit

$6,840

$6,960

Estimated Average Monthly Social Security Benefits Payable in January 2013:

On Thursday, the IRS released its annual revenue procedure making inflation adjustments to the gift tax annual exclusion and other items for tax years beginning in 2013 (Rev. Proc. 2012-41).

The gift tax annual exclusion will increase from $13,000 to $14,000 in 2013 and the amount of foreign earned income that taxpayers can exclude increases from $95,100 to $97,600. The amount used to reduce the net unearned income reported on a child’s tax return to calculate the kiddie tax increases from $950 to $1,000. Other inflation-adjusted amounts include the alternative minimum tax exemption for the kiddie tax, the private activity bond volume cap, the limitation on eligible long-term care premiums, high-deductible health plan definitions, the threshold for required reporting of receipt of large gifts from foreign persons, and 20 other provisions.

Rev. Proc. 2012-41 does not include the inflation adjustments for the tax tables, the Sec. 23 adoption credit, the Sec. 24 child tax credit, the Sec. 25A Hope scholarship and lifetime learning credits, the Sec. 32 earned income tax credit, the standard deduction, the Sec. 68 overall limitation on itemized deductions, the Sec. 132(f) qualified transportation fringe benefit, the Sec. 137 adoption-assistance exclusion, the Sec. 151 personal exemption, the Sec. 179 election, the Sec. 221 interest on education loans, and the unified estate credit, all of which will be addressed in separate guidance, the IRS said. Many of these items are scheduled to expire or change at the end of the year, and the IRS may be waiting to see what actions Congress takes in its lame-duck session.

The IRS also announced the 2013 contribution limits and other figures for pension plans and other retirement-related items (IR-2012-77). The elective deferral (contribution) limit for employees who participate in Sec. 401(k), 403(b), or 457(b) plans and the federal government’s Thrift Savings Plan increases from $17,000 to $17,500. The catch-up contribution limit under those plans for those age 50 and over is unchanged at $5,500.

On Tuesday, the Social Security Administration announced that the Social Security wage base for 2013 will be $113,700 (up from $110,100 in 2012).

Wednesday, September 26, 2012

The Agenda has now profiled three small
businesses that are struggling in different ways with providing health
insurance to employees. (Previous related stories: Small-Business Health Care Profiles)
The companies are very different — they trade in very different parts
of the economy, and couldn't be located much further apart
geographically — but they do have one thing in common: Though all three
have fewer than 25 employees, not one has qualified for the tax credit
in the Affordable Care Act that was intended to
help small businesses pay for health insurance. Indeed, the credit is
one element of the controversial health law that has already fallen
short of expectations.

Estimates
of the number of businesses eligible to take the tax credit have ranged
from 1.4 million to 4 million companies, but in May, the Government
Accountability Office reported that only 170,300 firms actually claimed
the credit in 2010. Of these, only a small fraction, 17 percent, were
able to claim the whole credit.

For
eligible companies, the credit effectively refunds 35 percent of health
insurance expenses between 2010 and 2013.* After 2014, the credit
increases to 50 percent and is available for any two consecutive years.
The credit is fully available to companies with 10 or fewer full-time
employees and average wages below $25,000. It phases out as the number
of employees rises to 25 and wages grow to $50,000. In 2009, there were
about 4.6 million companies with fewer than 10 employees, according to
the Census Bureau, and 5.7 million with fewer than 100.

The
credit was aimed squarely at the smallest companies, which rarely offer
health insurance to employees. However, as we reported two weeks ago,
it appears not to have persuaded very many to start offering insurance.
The most recent study of employer health insurance from the Kaiser
Family Foundation found that just half of all companies with fewer than
10 employees offered insurance, a share that has not moved much since
2005.

So why has the credit fallen short of
expectations? The G.A.O. concluded that the credit was too small to sway
business owners. Moreover, it said, claiming the credit is a task so
complicated as to discourage many companies from trying. Companies have
to determine the number of hours each employee worked in the year, as
well as compile information about their insurance premiums.
"Small-business owners generally do not want to spend the time or money
to gather the necessary information to calculate the credit, given that
the credit will likely be insubstantial," the report said, citing
conversations with tax preparers. "Tax preparers told us it could take
their clients from two to eight hours or possibly longer to gather the
necessary information to calculate the credit and that the tax preparers
spent, in general, three to five hours calculating the credit."

The G.A.O. report hints at the complexity with this delicious example:

On
its Web site, I.R.S. tried to reduce the burden on taxpayers by
offering "3 Simple Steps" as a screening tool to help taxpayers
determine whether they might be eligible for the credit. However, to
calculate the actual dollars that can be claimed, the three steps become
15 calculations, 11 of which are based on seven worksheets, some of
which request multiple columns of information.

It
may be tempting to hold the Internal Revenue Service responsible for
whatever burden accompanies the tax credit, but in this case, the
complexity is written directly into the law. It turns out that
legislators wrote the provision in a way that makes it appear more
generous than it really is. Many businesses with both fewer than 25
employees and average wages below $50,000 are in fact unable to claim
the credit.

Under
the law, once such a business has calculated its potential credit, it is
required to reduce the credit first to account for any excess employees
over 10 and then separately reduce the potential credit to account for
any excess average wages paid over $25,000. For many companies, the two
reductions exceed the potential credit itself - meaning the business
gets no credit.

That's
what happened to Carrie Van Dyck, who along with her husband owns the
Herbfarm Restaurant outside of Seattle. Excluding its owners, the
Herbfarm, which we profiled in June, employed the equivalent of about 21
or 22 full-time staff members, who were paid an average wage of about
$35,000 - a few thousand dollars over the credit's threshold for 21
employees. The result surprised Ms. Van Dyck, she said recently by
e-mail, because "it would seem that we are a pretty typical small,
mom-and-pop type business that this should apply to."

Of
course, by making the credit less generous, the senators who wrote the
law made it less expensive to the United States Treasury. Now it is
apparent that credit will be even cheaper than planned: initially it was
expected to cost the Treasury $2 billion in 2010; instead it cost the
government only a quarter of that.

The
law also excludes owners and owners' families from counting toward the
credit, which can cut both ways. On the one hand, owners don't count as
employees and their salaries are excluded from the annual wages,
exclusions that could make some companies eligible for a bigger credit
than they might otherwise have gotten. On the other hand, premiums paid
for the owners' and their families' insurance aren't eligible for the
credit, which for some companies, as You're The Boss commenter JAB
recently noted, "greatly reduces the incentive to provide coverage for
employees."

The
White House has said that the number of businesses claiming the credit
for 2011 has grown to at least 360,000, but that is still well below
even the smallest estimate of eligible businesses. Some advocates for
the law say that more businesses will take advantage of the credit in
2014, when it grows to 50 percent, especially if the new insurance
exchanges make it easier and cheaper for small companies to offer
insurance.

The
Obama administration has proposed making more businesses eligible for
the credit, in part by starting phase-outs at higher thresholds, and
also by changing the way it is calculated so that every business within
the limits, such as the Herbfarm Restaurant, can take some amount of
credit.

But
judging from the comments of Representative Sam Graves, chairman of the
House Small Business Committee, the initiative is unlikely to pass a
Republican-controlled House anytime soon. "This tax credit has already
largely failed to attract small-business owners, and expanding it will
not make the president's health care law affordable," the Missouri
Republican said in a statement. "For small employers that do not offer
health insurance, tax incentives are unlikely to cause many of them to
choose a massive new expense they just cannot afford in the first
place." It was Mr. Graves who sought the G.A.O. report.

Of
course, a business denied a credit has not been made worse off by the
2010 health law. But the law surely has raised and dashed a lot of
hopes, and these are the early days - the sweeping changes that are the
law's hallmark don't come until 2014.

*There are, of course, many caveats here, but the main one is that the company has to pay at least half of the premium.

Under the law, Americans must be insured starting in 2014 or pay a penalty assessed on their tax returns.

Shortly after the legislation passed in 2010, the Congressional
Budget Office, working alongside the Joint Committee on Taxation,
estimated that in 2016 roughly four million people a year would opt to
pay the penalty instead of getting coverage. On Wednesday, the CBO and
JCT revised that figure up to six million, citing legislation passed
since 2010 as well as the weaker economic outlook.

The groups also pointed to the Supreme Court's decision earlier this year to make the health care law's expansion of Medicaid optional for states.

Of those people who opt for the penalty, 10% are projected to be
below the federal poverty level for 2016, which the CBO and JCT estimate
will stand at about $12,000 for an individual or $24,600 for a family
of four.

In 2014, the penalty will be no more than $285 per family, or 1%
of income, whichever is greater. In 2015, the cap rises to $975, or 2%
of income. And by 2016, it reaches $2,085 per family, or 2.5% of income,
whichever is greater.

The dollar amounts for a single adult would be $95, $325 and $695 during that same time period.

Roughly 30 million non-elderly Americans are projected to remain
uninsured in 2016, though most will not be subject to the penalty tax.
For instance, the penalty will be waived for people with very low
incomes who don't have to file tax returns, those who are members of
certain religious groups, or people who face insurance premiums that
would exceed 8% of family income even after including employer
contributions and federal subsidies.

Penalty payments collected in 2016 are expected to total $7 billion, about $3 billion more than previously estimated.

Tuesday, August 14, 2012

Social Security surplus is projected to run out in 2033, forcing a 25
percent cut in benefits. To fix Social Security, Congress would have to
find $8.6 trillion.

By
Stephen Ohlemacher, Associated Press /
August 13, 2012

WASHINGTON

As millions of baby boomers flood Social Security with applications
for benefits, the program's $2.7 trillion surplus is starting to look
small.

For nearly three decades Social Security produced big surpluses,
collecting more in taxes from workers than it paid in benefits to
retirees, disabled workers, spouses and children. The surpluses also
helped mask the size of the budget deficit being generated by the rest
of the federal government.

Those days are over.

Since 2010, Social Security has been paying out more in benefits than
it collects in taxes, adding to the urgency for Congress to address the
program's long-term finances.

"To me, urgent doesn't begin to
describe it," said Chuck Blahous, one of the public trustees who
oversee Social Security. "I would say we're somewhere between critical
and too late to deal with it."

The Social Security trustees
project the surplus will be gone in 2033. Unless Congress
acts, Social Security would only collect enough tax revenue each year to
pay about 75 percent of benefits, triggering an automatic reduction.

Lawmakers
from both political parties say they want to avoid such a dramatic
benefit cut for people who have retired and might not have the means to
make up the lost income. Still, that scenario is more than two decades
away, which is why many in Congress are willing to put off changes.

But
once the surplus is spent, the annual funding gaps start off big and
grow fast, which could make them hard to rein in if Congress
procrastinates.

The projected shortfall in 2033 is $623 billion,
according to the trustees' latest report. It reaches $1 trillion in 2045
and nearly $7 trillion in 2086, the end of a 75-year period used
by Social Security's number crunchers because it covers the retirement
years of just about everyone working today.

Add up 75 years' worth
of shortfalls and you get an astonishing figure: $134 trillion.
Adjusted for inflation, that's $30.5 trillion in 2012 dollars, or eight
times the size of this year's entire federal budget.

In present
value terms, the Social Security Administration says the shortfall is
$8.6 trillion. That means the agency would need to invest $8.6 trillion
today, and have it pay returns of 2.9 percent above inflation for the
next 75 years, to produce enough money to cover the shortfall.

That's
the rate of return Social Security expects to get from its trust funds.
The problem, of course, is that Social Security doesn't have an extra
$8.6 trillion to invest.

Social Security Commissioner Michael J. Astrue
said he is frustrated that little has been done to solve a problem that
is only going to get harder to fix as 2033 approaches. If changes are
done soon, they can be spread out over time, perhaps sparing current
retirees while giving workers time to increase their savings.

"It won't be easy but it's just going to get harder the longer they wait," Astrue said.

President Barack Obama
created a deficit-reduction commission in 2010 but didn't embrace its
plan for Social Security: raising the retirement age, reducing benefits
for medium- and high-income workers and raising the cap on the amount of
wages subject to the payroll tax, all very gradually.

The issue has been largely absent from this year's presidential election. Neither Obama nor his Republican opponent, Mitt Romney, has made it a significant part of the campaign.

Thursday, August 9, 2012

California sent out $1 billion in unemployment payments in June, a
50% drop from the peak two years ago, the Employment Development
Department reports.

Part of the decline is due to fewer people being unemployed. By EDD’s
count, there were 1.97 million Californians who were out of work this
June compared to 2.26 million in June 2010 and 2.19 million last year.

However, the biggest reason for the drop in payouts this year is
because California fell short in April of the federal eligibility
requirements for the maximum 99 weeks of benefits.

Normally, unemployed workers are only eligible for 26 weeks of state
aid. But because of the length and depth of the national economic
downturn — the U.S. lost nearly 7 million jobs during the 18 months of
the official recession — Congress extended unemployment benefits to 99
weeks.

Even though California has the third highest unemployment rate in the
country, the state failed in April to meet the complex federal formula
for state eligibility.

As a result, benefits in California were cut to 79 weeks in May and more than 90,000 long-term unemployed had their payments cut off.

With 709,000 of California’s unemployed in June out of work more than
52 weeks, thousands of other long-term unemployed are expected to
exhaust their benefits each month.

California’s maximum benefits will be further cut to a maximum of 72
weeks in September as part of an overall effort by Congress to reduce
the number of people getting aid.

Although the drop in total payouts is welcome news to the state, it does little to affect the projected $10.2 billion deficit in California’s unemployment insurance trust fund.

The state’s trust fund for unemployment payments ran out of money in
January 2009, when claims outstripped payments by employers. California
has been borrowing money from the federal government to make up the
difference since then.

Last year, the state had to start paying back interest on the federal
loan — a payment that totaled $303.5 million. Another $313 million in
interest is due in September. The state is making the payments from
money borrowed from the California disability insurance trust fund,
which will have to be paid back within four years.

To begin paying off the $10 billion in principal due Uncle Sam,
employers are being charged an additional $21 a year per worker this
year in federal payroll taxes ($77 per worker total). The state
legislative analyst estimates the increased payroll tax will cost
California employers an extra $290 million this year and $580.9 million
in 2013.

Friday, August 3, 2012

The Senate Finance Committee approved legislation Thursday on a 19 to 5 vote extending
dozens of tax cuts known as tax extenders, including a two year alternative
minimum tax patch. Other provisions would extend the ability for school teachers to deduct
expenses for school supplies, mortgage debt relief to 2013 and the election to take an itemized
deduction for state and local general sales taxes in lieu of the
itemized deduction permitted for state and local income taxes, along
with the above-the-line deduction for qualified tuition-related
expenses and tax-free distributions from individual retirement plan for charitable purposes. Energy-related provisions include an extension of the wind
energy production tax credit for one year, through Dec. 31, 2013, while
changing the "placed in service" date for the wind energy facility to
when construction begins.

Since the first payment was made in January 1937, Social Security has
provided a safety net and source of reliable income for retired
workers, their spouses and dependents. But getting the most from your
Social Security benefits is far from simple.

While you can begin collecting Social Security as young as age 62,
your benefits will be smaller than if you had waited to full retirement
age (66) or later. But while waiting longer can mean more money
monthly, it may result in less money overall if you die early, so
selecting the right age to file is a critical component to maximizing
your benefits.

Kevin Worthley, a certified financial planner with
the Retirement Co. of New England, says it is important to make the
right decision about when to file because there are almost no second
chances when it comes to Social Security.

"There used to be a strategy called a do-over where recipients could
receive benefits early, then years later withdraw their application,
repay the benefits received and then reapply for benefits going forward
at a higher payout," Worthley says. "The technique was overly promoted
and somewhat abused, so the Social Security Administration curtailed the
technique recently by only allowing a do-over if implemented within 12
months of the original receipt of income benefits."

So to get it right the first time, avoid committing these seven Social Security sins.

1. Waiting past age 66 to file

Even if you don't intend to
collect benefits until after age 66, don't forget to file by the time
you reach full retirement age. If you don't wish to collect at that
time, simply indicate that you want to suspend your benefits so they can
keep growing.

Failing to file by 66 negates the possibility of earning a full
lump-sum repayment if you later decide you'd rather have collected those
suspended benefits (such as might occur if you suffer health problems
in your late 60s). In that scenario, the lump-sum option will award you
all you would have collected to that point at once, but this works only
if you filed on time.

In addition, using a "file-and-suspend"
strategy can also allow your spouse to begin collecting benefits while
you continue working.

2. Waiting past age 70 to collect

There
is a financial incentive for seniors to delay collecting Social
Security past their full retirement age. For each year they wait, their
benefits get a bump of between 5.5% and 8%. However, there are no
additional benefits for waiting past age 70. At that point, any further
delay in collecting simply means money lost.

3. Neglecting spousal benefits

Social Security offers several options for spousal benefits,
so don't miss this opportunity to bring in some extra cash if you or
your spouse is eligible. For example, if you are collecting benefits and
your spouse is at least 62 and isn't collecting benefits, your spouse
is eligible for a separate spousal benefit. The beauty of this
arrangement is that it doesn't diminish your benefits in any way.

"In
addition, a spouse who has reached full retirement age and whose spouse
is already receiving a benefit can claim a spousal benefit while
continuing to work and letting his or her own benefits grow for the
future," says Worthley.

4. Forgetting former spouses

After a divorce, the last thing
you may want to remember is your former partner. However, if you were
married to someone for 10 years and have been divorced for at least two,
you are eligible to collect a spousal benefit from the relationship,
provided both of you are eligible to collect benefits. However, this
only works if you are unmarried when you file to collect.

In addition, when that former spouse dies, you can begin to collect his or
her full level of benefits -- just as you would with a current spouse.

5. Assuming you and your spouse should file at the same time

Filing
for Social Security doesn't have to be an all-or-nothing proposition
for couples. In fact, using a so-called hybrid strategy can be an
effective way to maximize Social Security benefits that the two of you
receive. One spouse can file for benefits at a younger age while the
other waits until later to maximize benefits.

"This especially
works when the husband's benefit is substantially more than the wife's,"
says Worthley. "Assuming the wife has a higher longevity expectation,
she will acquire his higher income benefit for the remainder of her
life. Since women generally live longer than men, this nuance can be
important."

6. Waiting too long to collect if you already have health problems

While
Worthley counts automatically filing at age 62 as a common mistake, it
can be a smart move for those with serious or chronic health conditions.
If you don't reasonably expect to live into your 70s, filing early may
increase your overall payout.

"That
said, remember that medical advances are allowing people to live far
beyond their expectations," says Worthley. "So, unless your health is
debilitating, don't assume your life expectancy will be short."

7. Dying without warning

Remember
the bit about later applying for a lump-sum repayment if you deferred
your benefits? It doesn't work if you're dead. That means your family
will be left out in the cold on those deferred earnings if you don't
collect them before you die. While this sin is harder to avoid than the
others, making sure to file by at least age 66 can help make you more
prepared.

About Me

Born and raised in Hong Kong. Moved to Sacramento, CA in 1968 to attend college.

Recent travel destinations include Antarctica Peninsular, Arctic Svalbard; Churchill, Manitoba; Machu Picchu; Shanghai; river cruise from St. Petersberg to Moscow; river cruise from Nanjing to Chongqing; plus various national parks.

My first SLR camera is a Minolta SRT-101 and my latest camera is a Nikon D300.